DealLawyers.com Blog

October 24, 2007

Deconstructing the Sallie Mae MAC

With several deals unwinding due to the credit crunch, some new law looks inevitable regarding “Materal Adverse Effect” closing condition. One case likely to go to trial in the Delaware Chancery Court relates to the acquisition of Sallie Mae (“SLM”) by a buyout consortium led by JC Flowers.

From Kevin Miller of Alston & Bird: The definition of an MAE in the SLM merger agreement has a carveout for changes in Applicable Law – but there also is a carveout to the carveout for changes in Applicable Law relating to the education finance industry that are in the aggregate more adverse to the Company and its subsidiaries taken as a whole then those disclosed in SLM’s 10-K.

Consider how the carveout to the carveout in the SLM definition might be differently interpreted if it read as follows (changes highlighted):

“changes in Applicable Law” shall not include any changes in Applicable Law relating specifically to the education finance industry [insert – to the extent they] [delete – that] are in the aggregate [insert – materially] more adverse to the Company and its Subsidiaries, taken as a whole, than the legislative and budget proposals described under the heading “Recent Developments” in the Company 10-K, in each case in the form proposed publicly as of the date of the Company 10-K)”

The first modification arguably changes the carveout from a tipping basket to a deductible and the latter arguably increases the trigger threshold.

VC Strine on the Sallie Mae MAC

Kevin Miller also notes: On Monday, a scheduling hearing was held in front of Vice Chancellor Strine in the Delaware Chancery Court regarding the JC Flowers-SLM lawsuit.

Ultimately, VC Strine refused to grant SLM’s request for an expedited hearing after JC Flowers agreed (in response to a proposal made by SLM’s attorney) to waive the interim operating covenants, including the no-shop provision contained in the merger agreement.

Below is an excerpt from the transcript on how to interpret the SLM MAE clause, which is the critical issue in the dispute:

MR. SUSMAN [For SLM]: Your Honor, just a few points. They keep saying — I think they finally admitted that basically, they are not going to close, ever, regardless of what we give them or don’t give them, because in their view, an MAE has taken place, and the only thing that can happen is Congress could all of a sudden magically decide to change its mind.

So that position, that an MAE has taken place, and that they do not have to abide by the contract, is the repudiation, which under traditional contract law excuses our further performance. Why should we have to be doing a lot of things to give them information on and on — except in discovery, of
course we have to give them information — if they have already repudiated their obligation under the contract?

The discovery in this — I mean, again, the interpretation of what the MAE clause means is, I think, a legal matter. We can do briefs and get the Court to resolve that as a matter of law very quickly once you tell us what the rule is, the standard is, for an MAE. The difference between the parties — there are two issues. It’s very, very simple, what it is. They say that if the legislation that was passed is 1 or $2 more adverse, then the legislative proposals described in the 10-K — that then you have to consider the entire impact of that legislation. We say, “No. It’s just the incremental impact that is considered. You knew about the possibility. The baseline was what was disclosed, and the delta is how much more adverse.”

THE COURT: I get that.

A Penny for Your Thoughts, a Nickel for Your Fairness Opinion

And more from Kevin: JC Flower’s attorney’s argued that in addition to the existence of a MAC, the conditions to the closing have not been satisfied because JP Morgan and BofA have not been provided with the “Required Information” [e.g., financial projections and other information] to which they are entitled and which they need to sell the bonds necessary to finance the transaction.

That led to the following exchange regarding the information the buyers/banks need to a finance the transaction versus the information banks need to render a fairness opinion. Below is an excerpt from the transcript:

THE COURT: Aren’t they just going to rely, like when they give fairness opinions — they just rely, without any independent verification, upon
the information given to them.

MR. WOLINSKY [For JC Flowers]: The guys who put their money on the — into the bonds, I’m told they don’t quite do that.

THE COURT: But the bank is saying this. Right?

MR. WOLINSKY: The — JPMorgan and Bank of America are saying, “To sell these bonds, we need more financial information.”

THE COURT: That’s what I’m saying. It’s a different standard than when they give a fairness opinion.

MR. WOLINSKY: Absolutely.

THE COURT: I wanted to be clear.

MR. WOLINSKY: This is real money changing hands.

THE COURT: A fairness opinion is just a fairness opinion.

MR. WOLINSKY: A fairness opinion, you know — it’s the Lucy sitting in the box: “Fairness Opinions, 5 cents.”